Requires lookup or master-detail relationship to reference from another object.

Counts against cross-object reference limit when used in formulas.

Custom Objects are SOQL expensive.

We can use Page layouts, record types, validation rules, triggers and workflow rules on Custom Objects.

Custom Settings:

Custom Settings are similar to Custom Objects and enable application developers to create custom sets of data, as well as create and associate custom data for an organization, profile, or specific user. We can say Custom Settings are like configuration file that we used to have.